Dealers braced as the Fed ponders

AMERICA'S interest rates are set to stay at a 45-year low of 1% when the US Federal Reserve meets tomorrow.

Friday's smaller-than-expected 57,000 gain in US employment reduced the likelihood of an early tightening, but the Fed's accompanying statement will be closely examined to see if there is any retreat from its commitment to keep policy accommodative for a considerable period of time.

It adopted the 'considerable period' phrase in August and to drop it from tomorrow's Federal Open Market Committee statement would inflame fears of a rate rise in the short term.

The Bank of England's monetary policy committee has so far been the biggest fish to fall foul of the rising monetary tide, but should the US change direction too soon, world stock markets could wobble.

Bear Stearns believes the Fed could drop its accommodative pre-commitment and lift rates in March.

Chancellor Gordon Brown will take centre stage on Wednesday with his Pre-Budget Report. He is expected to maintain his existing growth projections which show Gross Domestic Product growth in a range of 2% to 2 1/2% this year and 3% to 3 1/2% next year.

The inflation target will be changed from 2 1/2% on the RPIX measure to 2% on the Harmonised Index of Consumer Prices (HICP) - the measure employed by the European Central Bank.

The Bank of England is not happy. It believes the change to HICP will make it harder to justify raising interest rates.

The Footsie has failed to break through the 4400 mark for a sustained period and Wall Street has flirted with the magic 10,000 level before retreating back below 9900.

Fed chairman Alan Greenspan and Gordon Brown will both decide whether those barriers are broken before Christmas.